Butterfly Shows 3-Year Expensive Before Sale: Chart of the Day

Jan. 8 (Bloomberg) -- Treasury three-year notes are trading
at almost the the most expensive levels in more than seven
months compared with two- and five-year debt, as the U.S.
prepares to sell $32 billion of the securities.

The CHART OF THE DAY shows the butterfly index spread,
which measures how the three-year note is performing against the
other two securities, is around negative 30 basis points, just
up from negative 31 basis points on Jan. 3, the most expensive
since May 2012. A negative figure indicates investors are more
bullish on the middle of the three securities, making it
relatively expensive versus the others.

Three-year notes have richened since the Federal Reserve
ended its stimulus program in December, known as Operation
Twist, where the central bank sold short-term debt and bought an
equal amount of long-term Treasuries to keep borrowing rates
low. The Fed is now buying $45 billion of Treasuries a month of
all maturities.

“Three-year notes are richer, but we’ve been at
artificially cheapened levels because of the Fed’s sales, but
the market is returning to an equilibrium,” said Scott Sherman,
an interest-rate strategist at Credit Suisse Group AG in New
York, one of 21 primary dealers that trade directly with the
central bank. “With the persistent source of selling pressure
from the Fed gone and the Fed still on hold, demand has returned
to that sector, even at these levels.”

The three-year notes scheduled for sale today yielded 0.40
percent in pre-auction trading, compared with a record low 0.327
percent at the previous sale on Dec. 11.

The butterfly-index spread is calculated by replicating a
trade that involves the sale of the two- and five-year
securities, as the chart pattern’s wings; buying double the
amount of three-year notes, as the body; and multiplying by 100.